Epsilon Energy Ltd. (EPSN)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in the understanding of trends and significant changes in our results of operations and the financial condition of Epsilon Energy Ltd. and its subsidiaries for the periods presented. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto presented in this report, including the unaudited condensed consolidated financial statements as of June 30, 2026 and 2025 together with accompanying notes, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2025. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs, and expected performance. Actual results and the timing of events may differ materially from those contained in these forward- looking statements due to a number of factors. See “Part II. Item 1A. Risk Factors” and “Forward-Looking Statements.”

Overview

Epsilon Energy Ltd. (the “Company”) is a North American onshore focused independent natural gas and oil company engaged in the acquisition, development, gathering and production of natural gas and oil reserves. Our areas of operations are the Appalachian Basin in Pennsylvania, the Powder River Basin in Wyoming, the Permian Basin in Texas and New Mexico, and the Western Canadian Sedimentary Basin in Alberta, Canada.

At June 30, 2026 we held leasehold rights to 52,290 net acres. We have natural gas production from our non-operated wells in Pennsylvania and natural gas, natural gas liquids, and oil production from our operated and non-operated wells in the Permian, Powder River, and Western Canadian Sedimentary Basins.

At December 31, 2025 our total estimated net proved reserves were 86.4 Bcf of natural gas reserves, 9.3 MMBbls of oil reserves, and 2.4 MMBbls of NGL reserves.

Our Pennsylvania (“PA”) assets are supported by our 35% ownership in the Auburn GGS.

Our common shares trade on the NASDAQ Global Market under the ticker symbol “EPSN.”

Business Strategy

We are committed to disciplined capital allocation which could include shareholder returns in the form of dividends and/or share buybacks. We plan to maintain a strong balance sheet and liquidity position to allow us to opportunistically invest in both our existing project areas and potential new projects.

On November 14, 2025, Epsilon acquired Peak Exploration and Production LLC and Peak BLM Lease LLC and their subsidiaries (together, "Peak") through a business combination. The acquisition added 284 gross (60 net) wells, including 105 gross (45 net) operated wells, and 60,945 gross (39,566 net) acres located in Campbell, Converse and Johnson Counties, Wyoming.

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On December 11, 2025, Epsilon divested Dewey Energy Holdings, LLC, a wholly owned subsidiary of the Company to an undisclosed private buyer. The assets sold included approximately 964 Mcfe/d (60% natural gas) of production and approximately 6,400 net deep acres and 2,200 net shallow acres of leasehold, all located in Dewey County, Oklahoma.

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On May 4, 2026, the Company divested certain overriding royalty interests (ORRIs) in Susquehanna Co, Pennsylvania to an undisclosed private buyer for $3.9 million. The assets covered 940 gross acres and 90 producing Marcellus wells with an average net revenue interest of 0.25% per well.

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We have a substantial remaining drillable location inventory within our existing leaseholds in Pennsylvania, Wyoming, and Texas.

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Three and six months ended June 30, 2026 Highlights

Operational Highlights

Marcellus Shale – Pennsylvania

Powder River Basin – Wyoming

Permian Basin – Texas and New Mexico

Western Canadian Sedimentary Basin—Alberta, Canada

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Non-GAAP Financial Measures-Adjusted EBITDA

Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of natural gas and oil properties, (5) non-cash stock compensation expense, (6) transaction costs, (7) gain or loss on derivative contracts net of cash received or paid on settlement, (8) gain or lss on sale of assets, and (9) gain or loss on foreign currency traslations. Adjusted EBITDA is not a measure of financial performance as determined under U.S. GAAP and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity.

Additionally, Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Epsilon has included Adjusted EBITDA as a supplemental disclosure because its management believes that Adjusted EBITDA provides useful information regarding its ability to service debt and to fund capital expenditures. It further provides investors a helpful measure for comparing operating performance on a normalized or recurring basis with the performance of other companies, without giving effect to certain non-cash expenses and other items. This provides management, investors and analysts with comparative information for evaluating the Company in relation to other natural gas and oil companies providing corresponding non-U.S. GAAP financial measures or that have different financing and capital structures or tax rates. These non-U.S. GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with U.S. GAAP.

The table below sets forth a reconciliation of net income to Adjusted EBITDA for the three and six months ended June 30, 2026 and 2025, which is the most directly comparable measure of financial performance calculated under U.S. GAAP and should be reviewed carefully.

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Results of Operations

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Net Operating Revenues

For the six months ended June 30, 2026, revenues increased $16.1 million, or 58%, to $43.9 million from $27.8 million during the same period of 2025.

Revenue and volume s

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ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion is intended to assist in the understanding of trends and significant changes in our results of operations and the financial condition of Epsilon Energy Ltd. and its subsidiaries for the periods presented. This section should be read in conjunction with the audited consolidated financial statements as of December 31, 2025 and 2024 and for the years then ended together with accompanying notes.

Overview

Epsilon Energy Ltd. (the “Company”) is a North American onshore focused independent natural gas and oil company engaged in the acquisition, development, gathering and production of natural gas and oil reserves. Our areas of operations are the Appalachian Basin in Pennsylvania, the Powder River Basin in Wyoming, the Permian Basin in Texas and New Mexico, and the Western Canadian Sedimentary Basin in Alberta, Canada.

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At December 31, 2025 our total estimated net proved reserves were 86.4 Bcf of natural gas reserves, 9.3 MMBbls of oil reserves, and 2.4 MMBbls of NGL reserves, and we held leasehold rights to approximately 101,265 gross (54,044 net) acres. We have natural gas production from our non-operated wells in Pennsylvania and natural gas, natural gas liquids, and oil production from our operated and non-operated wells in the Permian, Powder River, and Western Canadian Sedimentary Basins.

We are committed to disciplined capital allocation which could include shareholder returns in the form of dividends and/or share buybacks. We plan to maintain a strong balance sheet and liquidity position to allow us to opportunistically invest in both our existing project areas and potential new projects.

Our Pennsylvania (“PA”) assets are supported by our 35% ownership in the Auburn GGS.

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We have a substantial remaining drillable location inventory within our existing leaseholds in Pennsylvania, Wyoming, and Texas.

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On November 14, 2025, Epsilon acquired Peak Exploration and Production LLC and Peak BLM Lease LLC and their subsidiaries (together, "Peak") through a business combination. The acquisition added 284 gross (60 net) wells, including 105 gross (45 net) operated wells, and 60,945 gross (39,566 net) acres located in Campbell, Converse and Johnson Counties, Wyoming.

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On December 11, 2025, Epsilon divested Dewey Energy Holdings, LLC, a wholly owned subsidiary of the Company to an undisclosed private buyer. The assets sold included approximately 964 Mcfe/d (60% natural gas) of production and approximately 6,400 net deep acres and 2,200 net shallow acres of leasehold, all located in Dewey County, Oklahoma.

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During 2025, we realized net loss of $5.8 million as compared to net income of $1.9 million for 2024. This included a $19.3 million loss in Q4 2025 on the sale of our Anadarko Basin assets in Oklahoma, which provides potential tax benefits that may be utilized going forward.

At December 31, 2025, our total estimated net proved developed reserves were 109,444 MMcfe, a 69% increase from December 31, 2024. The increase is mainly attributable to Wyoming reserves acquired from the Peak acquisition.

At December 31, 2025, our total estimated net proved reserves were 156,037 MMcfe, a 86% increase from December 31, 2024. The increase is mainly attributable to Wyoming reserves acquired from the Peak acquisition.

Our standardized measure of discounted future net cash flows as of December 31, 2025 and 2024 was $156.1 million and $50.7 million, respectively. This measure of discounted future net cash flows does not include any estimate for future cash flows generated by our gathering system assets.

Results of Operations

The following review of operations for the periods presented below should be read in conjunction with our consolidated financial statements and the notes thereto.

Revenues

During the year ended December 31, 2025, revenues increased $20.1 million, or 64%, to $51.6 million from $31.5 million during the year ended December 31, 2024.

Revenue and volume statistics for the years ended December 31, 2025 and 2024 were as follows:

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Upstream natural gas revenue for the year ended December 31, 2025 increased by $18.3 million, or 170%, from 2024. An increase of $11.6 million was due to higher natural gas prices and an increase of $6.8 million was due to higher produced volumes as a result of previously delayed wells coming on line and the end of operator-elected well shut-ins in Pennsylvania.

Upstream natural gas liquids revenue for the year ended December 31, 2025 increased by $0.5 million, or 34% from 2024.  An increase of $0.2 million was due to higher produced volumes from new wells in the Permian and Powder River Basins and an increase of $0.3 million was due to higher natural gas liquids prices.

Upstream oil and condensate revenue for the year ended December 31, 2025 increased by $0.1 million, or 1% over 2024.  An increase of $2.7 million was due to increased production from new wells in the Permian and Powder River Basins offset by a reduction of $2.6 million due to lower oil prices.

Gathering system revenue (net of elimination) for the year ended December 31, 2025 increased by $1.2 million, or 21% over 2024. The increase was primarily due to slightly higher throughput, but more importantly, crossflow gas being displaced with Anchor Shipper gas which is charged a higher gathering fee. Revenues derived from transporting and compressing our production, which have been eliminated from gathering system revenues, amounted to $1.9 million and $1.1 million, respectively, for the years ended December 31, 2025 and 2024.

Operating Costs

The following table presents total cost and cost per unit of production (Mcfe), including ad valorem, severance, and production taxes for the years ended December 31, 2025 and 2024:

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Operating costs include the effects of elimination entries to remove the gathering fees paid to Epsilon’s ownership in the gathering system.

Upstream operating costs consist of lease operating expenses necessary to extract natural gas and oil, including gathering and treating the natural gas and oil to prepare it for sale. For the year ended December 31, 2025, upstream operating costs increased by $5.3 million, or 72% from the same period in 2024. The increase is primarily due to the increase in gas production in Pennsylvania and the acquired production in the Powder River Basin. The higher unit operating cost is primarily due to the higher liquids (oil and natural gas liquids) proportion of total sales (Mcfe).

Gathering system operating costs consist primarily of rental payments for the natural gas fueled compression units and overhead fees due to the system’s operator. For the year ended December 31, 2025, gathering system operating costs decreased by $0.1 million, or 4% from the same period in 2024.

Depletion, Depreciation, Amortization and Accretion (DD&A)

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Natural gas and oil and gathering system assets are depleted and depreciated using the units of production method aggregating properties on a field basis. For leasehold acquisition costs and the cost to acquire proved and unp

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